What is environmental due diligence and why is it needed?

The purpose of due diligence in a real estate transaction is to reduce and assess any aspect of the deal that might create financial uncertainty. Appropriate due diligence starts with the objective of the transaction. Are you purchasing an apartment complex? Or, are you developing newly zoned land for commercial buildings? Each transaction has its own specifics and therefore, due diligence varies depending on the nature of the deal.

Legacy liability

Legacy liability is a term that refers to inheriting the problems of the previous owner. Liability under federal environmental law for any toxic substance found on the property becomes the responsibility of the new owner, who now must pay for clean up or containment. Thus, an environmental assessment from a reputable engineering or environmental firm can save a lot of money in the future. Many items of concern may not be visually obvious and for that reason, it is important to have a professional investigate the property and its history to discover whether any such environmental risks are present.

Phase I Environmental Assessments

The reason you want to get a phase I environmental assessment is to invoke the innocent landowner defense in the event some type of historic contamination is found on the property. The Comprehensive Environmental Response, Compensation and Liability Act of 1980, also known as CERCLA, provides this defense for landowners who conduct appropriate due diligence prior to purchasing the property. It also protects those who obtain property through eminent domain or inherit contaminated land.

Depending on whether the property transaction is commercial or residential, different variables are taken into account during the environmental assessment. Scientists will review public records and look at the chain of ownership for that building or land and those surrounding it. They will search to see if there are any old gas stations, chemical spills from train or truck accidents, or if there was a former dry cleaning business on or near the site, and if so, whether these events were cleaned up or contained in the past.

Due diligence in the environmental aspect also includes testing for things like radon in residential buildings, and other risk factors as required by national, state, and local governments. Each community has different standards for zoning or permitting, and such information must be known, as administrative hearings, fines, or other consequences may follow if this step is neglected.

Regardless of whether the purchase is for a residential or commercial transaction, environmental due diligence has to be an essential task completed prior to closing the deal.

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